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Home Markets Currencies

Three reasons why some analysts believe the Naira is overvalued

Nairametrics by Nairametrics
May 9, 2015
in Currencies, Politics
Three reasons why some analysts believe the Naira is overvalued
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If you talk to currency dealers or foreign investors, the vibes you get is that the Naira is still very much overvalued and should be devalued. This is despite the fact that the currency has remained at N200 at the interbank and oil prices has started to rise rather than fall as most people expected. So why does some people really believe the naira is overvalued?

Pent up demand

Industry sources reveal the naira should be devalued because of the huge demand for dollars currently waiting on the sidelines. They claim the orders have been waiting for weeks and are yet to be filled as CBN’s restrictions have hampered supply  which has made it difficult to appropriately price the naira. Some have put this demand to be between $1.5billion and $2.5billion and rising. It is believed that if this demand is met, it will impact negatively on the external reserves leaving the CBN with no other reason but to devalue the naira.

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Government revenues

Another reason is the fiscal issues the federal government has been encountering since the global price of oil came crashing down. Most states are in such a fiscal mess now that they have no choice than to owe staff salaries. Some state have owed salaries for months now and due to their over reliance on Federal allocations, they get broke when Federal revenues thin out. The Minister of Finance also recently confirmed the country has already borrowed half its budgeted borrowings and spent it on paying salaries and funding other recurrent expenditures. Based on this, it is believed that the government may have to boost revenues by devaluing the naira.

CBN Restrictions

As stated above, the CBN has since the new year issued several policy directives that has placed restrictions on the demand and supply for dollar. Forex dealers believe this unprecedented move by the CBN has basically given the naira a false value which they feel cannot stand the full force of the effects of demand and supply on our exchange rate. Recently, Bloomberg carried news that the CBN in conjunction with Forex dealers are already exploring ways to loosen some of these restrictions. So perhaps, if this happen they believe the naira will again be devalued

Tags: Black MarketCapital controlsCBN Forex PolicyCBN NigeriaNaira DevaluationOil & Gasoil price
Nairametrics

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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